Introduction
In the ever-evolving landscape of the hospitality industry, full-service restaurants stand as a testament to culinary artistry, customer service, and business acumen. As accountants and advisors specializing in the financial intricacies of this sector, we have undertaken a comprehensive analysis of nearly 50 full-service restaurant establishments to offer insights into their financial performance, margins, and profitability.
This analysis delves into a detailed examination of key margins that define the success and sustainability of these establishments. Understanding the financial results of full-service restaurants necessitates a close look at their costs as a percentage of their revenues. By comparing these metrics across different establishments, we identify patterns and best practices that contribute to higher profitability. This comparative approach not only benchmarks performance, but also uncovers areas where cost management and revenue enhancement can be optimized.
Profitability, the ultimate measure of business success, is evaluated by integrating insights from revenue and margin analyses. We assess the influence of strategic decisions, such as menu pricing, supplier negotiations, and labor management, on the bottom line. This analysis considers the role of innovative technologies and management practices in driving profitability amidst industry challenges.
Through this detailed financial analysis, we aim to equip restaurant owners, managers, and stakeholders with actionable insights to navigate the complexities of the full-service restaurant business, fostering informed decision-making and long-term success.
Bob Gilbert Partner and Restaurants and Hospitality Industry Practice Co-Leader
The Research
Citrin Cooperman has compiled the year-end results of almost 50 full-service restaurants with revenues ranging from two million dollars to $35 million operating under different brands, serving different cuisines, and utilizing different management strategies. Clients consented for our team to collect and analyze their year-end information that we receive to prepare tax returns and financial statements. We took profit and loss data from each establishment, categorized their expense accounts into to consistent groupings, designated each establishment as a top, midrange, or low performer based on their normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percentage of revenues, and are presenting the aggregated results of each level below with additional
The performance levels were established based on the below:
TOP PERFORMERS
MID-RANGE PERFORMERS LOW PERFORMERS
EBITDA OF MORE THAN 17% OF REVENUES
EBITDA BETWEEN 17% - 10% OF REVENUES
EBITDA OF LESS THAN 10% OF REVENUES
CATEGORY GROUPINGS
The below listing details the underlying expense accounts that were included in certain categories:
• Costs of food, beverage, and disposables: Food purchases, beverage purchases, paper, plastic, disposables, take out supplies
• Labor: Taxes and benefits salaries, wages, bonuses, paid time off (PTO), employee benefits, payroll taxes, worker’s compensation, training, direct overhead allocations (not general management fees)
• Repairs, maintenance, and cleaning: Repairs, maintenance contracts, software maintenance, landscaping, cleaning, pest control
• Restaurant operations: Bar supplies, kitchenware, smallware, glassware, decorations, linens, uniforms, menus, equipment rental, bad debt expense,
REVENUES
processing fees, charges from delivery and reservation platforms, waste removal, security
• Bank and credit card fees: Bank and credit card fees, net of any employee tip withholding
• Marketing: Advertising, public relations, donations, promotions
• Occupancy: Rent, real estate taxes, common area maintenance (CAM), utilities (gas, electric, water, sewage, phone, internet), storage
• Administrative: Office expenses, payroll processing, professional fees, non-income taxes and licenses, insurance
Any income or expenses that are typically excluded from EBITDA were determined to be nonrecurring or related party transactions that are not arms-length (i.e., related party management fees) were excluded from the information below.
On average, these restaurants saw an increase in revenues of 5.1% in 2023 compared to 2022. While any increase in revenues is generally a good thing, it was noted that most operators attributed their revenue growth to price increases as opposed to an increase in covers. Price increases are necessary but do not result in sustainable growth. Many operators mentioned that their covers were down during 2023 due to tightened consumer spending and new competition.
This positive trend is also noted in our Private Company Performance Report, a survey which garnered over 1,000 responses from senior leaders of middle market private companies with revenues between $10 million to $1 billion+ across a wide range of industries.
MARGINS
Restaurant expenses were grouped into the below major categories and measured as a percentage of revenues. Below are the average results for the three performance levels.
EXPENSE CATEGORY
Among the establishments reviewed, the highest and lowest costs as a percentage of sales are listed below.
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Summary Analysis of Expenses
The results depend on many factors, such as geography, cuisine, customer base, and foot traffic, but we looked under the hood of some of these operators to determine what the most efficient operators do well and where the less efficient operators could use improvement.
How the top performers operate
FOOD AND BEVERAGE
Most operators were able to bring their cost of goods sold (COGS) down at least 1% from an average of 26% in 2022 to 25% in 2023. During the COVID recovery in 2021 into 2022, inflation skyrocketed, forcing restaurants to raise their prices several times over a 12- to 18-month span. The rise in food and beverage costs slowed down in 2023, but restaurants have been able to keep their increased prices, steadily resulting in increased profits.
1. Operators that can monitor food and beverage costs by menu item weekly are most successful in this area. They use inventory management programs, which account for the costs of each ingredient per menu item (i.e., recipe builders tracking perpetual ins and outs of food and beverage on hand). When integrated with a point-of-sale (POS) system, inventory management programs can tell you the profit margin of each menu item on a daily basis. The costs and legwork associated with acquiring and maintaining technology like this needs to be diligently vetted.
2. Several of the top performers in this category had strong brunch and lunch business. Brunch operations can be very profitable because of the use of economical ingredients (i.e., grains, potatoes), ingredient overlap, high table turnover, and highmargin cocktails.
3. Operators that are not married to particular food vendors ensure that they are getting the most competitive pricing. While using the same vendor for certain items repeatedly might be more comfortable, it is clear that consistent bidding requests can reveal market rates and prevent complacency. To simplify this exercise, some operators are members of alliances that allow them to participate in a high level of purchasing power that they otherwise wouldn’t maintain on their own.
For example, when measuring the time and effort with obtaining bids prior to placing orders versus the savings, a $10 million establishment that reduces overall food costs from 27% to 23% yields an additional $400,000 to the bottom line.
How the low performers operate
1. Low performers generally do not monitor their costs on a timely basis. They typically cannot justify why their costs fluctuated from one period to the next and do not adjust their pricing, portions, or menu items timely enough to maintain the margins that they are looking for. They do not perform consistent inventory counts under the assumption that their inventory is always around a certain amount. While their inventory on hand may generally be consistent, tracking fluctuations in a timely manner allows an operator to pull the necessary levers in their operations to ensure that they are getting the return that they are looking for.
2. As far as pricing, some lower performing operators have commented that they can only charge so much for certain menu items. Pricing is very sensitive, but the restaurant industry was able to successfully adapt to the aggressive post-COVID inflation increases, which have generally paid off for many operators. Customization add-ons (i.e., "add steak for $14" to a salad) and new offerings are a good way to incorporate price increases without causing friction with recurring customers.
LABOR
Labor costs continue to rise as expected. An increase in sales helped mitigate labor cost hikes from materially impacting the bottom line. Beyond statutory minimum wage hikes, operators are constantly navigating increases to employee benefits. It is worth noting that this expense category generated the largest difference between the average of top performers (34.5% of sales) versus the average of low performers (41% of sales).
How the top performers operate
Every operation is going to have some level of labor that is fixed, so regardless of any tips and tricks to keep these costs under control, the establishment needs to be producing a certain level of sales.
Sales aside, the use of technology allows the most efficient operators to monitor their costs so that they can make timely business decisions to keep margins intact.
Sticking with our example of an establishment generating $10 million in sales, the top performers are yielding an additional $650,000 to the bottom line on account of their savings on efficient labor costs.
Examples of technology that help control labor costs include:
Predictive scheduling to minimize overtime
Systematized training to mitigate the costs of turnover
Time entry restrictions (i.e., prohibiting employees from clocking in a certain number of minutes before their scheduled shift)
Take-out offerings with minimal front-of-house legwork
A flexible service model where guests can use their mobile devices to order another round of drinks or close out their bill without waiting for their server
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How the low performers operate
Low performers are often not managing their overtime and can have too many heads in the back of the house. Some operators have commented that their dishes are labor intensive, which is understandable. However, one would expect those establishments to have lower food costs given the labor involved, and this is not always the case. Also worth noting is the cost of turnover. High turnover is inevitable in the restaurant industry, but there is a steep cost to having to train for the same role multiple times per year. Investing in keeping employees satisfied and incentivized can ultimately save the business money.
BANK AND CREDIT CARD FEES
Surprisingly, bank and credit card fees slightly increased in 2023 compared to 2022. Providers in this market have been more and more competitive with one another over the last several years, but the race to undercut one another seems to have leveled off.
An operator should be able to get these fees to below 3%. There is often a lack of transparency as to how these fees are calculated, so this should be reviewed and questioned periodically. One reason why an operator might be locked into high fees is because POS providers have arrangements where they provide free hardware in exchange for an inflated processing fee. This is a very expensive method of financing the hardware, so it is important to understand the terms of any hardware financing.
How the top performers operate
Top performers will challenge their merchant processors when their costs are higher than expected. Some operators withhold a processing fee from their servers' tips. This effectively takes the processing fees that the operator pays on credit card tips and charges it to the servers that are receiving such tips.
If considering credit card fee withholding on tips, understand that:
1. Not remitting 100% of a non-discretionary tip (i.e., automatic gratuity) to an employee could result in that tip being subject to sales tax in certain states.
2. Some states do not permit employers to withhold fees from employees' tips.
How the low performers operate
Low performers are not challenging their providers and could be locked into high rates based on the hardware arrangement discussed above. Operators that have a significant number of parties or events may have to use a separate processing system to collect deposits online that may charge a higher rate than what they use in-store.
OCCUPANCY
Occupancy costs also have a significant impact on overall results. Some establishments were able to creatively use outdoor space, which has worked out well for them. Other establishments either do not have a customer base or adequate workforce to operate for two or three meals per day and cannot get the most of their space.
How the top performers operate
Unlike many other items detailed above, occupancy costs are not controllable expenses.
Top performers:
1. Have solid working relationships with their landlords, similar to a long-term business partnership
2. Get the most use of their space by efficient seating arrangements and offering outdoor dining
3. Communicate issues with their landlord promptly
4. Sometimes play hardball with their landlord when accommodations are necessary for the operation to survive
How the low performers operate
Low performers are often restaurants that are underperforming in revenues. Owners do not lock themselves into leases expecting to pay 20% rent, so it is typically revenue that needs the most focus and improvement.
OUTSIDE SERVICES
While inflation has leveled off some when it comes to commodities and products, we continue to see a rise in costs from service vendors. We saw increases in repairs and maintenance (17% increase from 2022), payroll processing (10% increase from 2022), and professional fees (9% increase from 2022). These costs will likely continue to trend upward consistent with labor rates.
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ADMINISTRATIVE EXPENSES
Among other expense items, administrative expenses include subcategories, such as insurance and payroll processing. It is worth noting that there was significant consistency among insurance expenses, which tightly ranged between 1.1% of revenues to 0.9% of revenues, and payroll processing, which ranged between 0.32% of revenues and 0.2% of revenues.
Example: The following table demonstrates how a high-performing hypothetical establishment that yields $10 million in annual revenue compares to a low-performing restaurant of the same revenue.
As shown above, a restaurant generating the same amount of revenues is capable of yielding an additional $2.25 million in profit by controlling costs. Obviously, performing at an optimal level in every category is difficult, but we hope that this analysis illustrates some realistic possibilities.
Key Insights
This analysis should either validate the efficiencies of your operation or incentivize you to improve in certain areas. Evaluating your margins with the information above is a great place to start to get an idea of other operators’ spending and profitability. Once improvement areas are identified, we encourage you to speak with a professional at Citrin Cooperman to discuss what tools and resources may be available to you and to assist with specific initiatives to generate your ideal returns.
Inside Citrin Cooperman’s Restaurants and Hospitality Industry Practice
Citrin Cooperman’s Restaurants and Hospitality Industry Practice is among the leading industry practices in the country. Our dedicated team of professionals works with some of the highest-rated restaurants in the world and their celebrity chefs. We provide a full range of professional services and industry insights to privately-owned and investor-backed restaurant groups, world-wide hospitality management groups, and multi-unit family-owned businesses. We also serve hotels and hotel management companies, nightlife establishments, boutique businesses and specialty retailers, caterers, resorts and casinos, and various entertainment venues. Reach out to Bob Gilbert to learn more about how we can help your business achieve its strategic vision.
About Citrin Cooperman
Citrin Cooperman is one of the nation’s largest professional services firms. Since 1979, we’ve steadily built our business by helping middle market companies and high net worth individuals find practical, actionable solutions to help them meet their short-term needs and long-term objectives. Our clients span a diverse array of industry and business sectors and find sustainable growth through utilizing our menu of comprehensive personal and professional services.
"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. The entities of Citrin Cooperman & Company, LLP and Citrin Cooperman Advisors LLC are independent member firms of the Moore North America, Inc. (MNA) Association, which is itself a regional member of Moore Global Network Limited (MGNL). All the firms associated with MNA are independently owned and managed entities. Their membership in, or association with, MNA should not be construed as constituting or implying any partnership between them.